# ECON CH1-3

 demand-GDP inventory investment assumption in short run price is fixedie. firms are willing to supply any amount of goods Consumption is a function of... disposable income Why are G&T exogenous? Governments do not behave with the same regularity as consumers or firms. Macroeconomists must think about the implications of alternative spending and tax decisions of the government. Difference btw GDP and total demand for goods Inventory investment; because it is not consumed it is not part of the demand *Components in GDP, eg. C and IM may offset each other and result in no net change in GDP Autonomous spending is positive when...negative when... Government is running a balanced budget or having budget deficit;very large budget surplus Formula of Z Z=(autonomous spending)+c1Y *Any change in autonomous spending will change output by more than one for one The multiplier effect/amplification effect comes from demand Z↑production Y↑income↑consumption↑hence Y↑>initial shift in demand Y=income/production; Z=... Demandexpenditurespending Interpreting the multiplier The sum of all successive increase in production How Long Does It Take for Output to Adjust? assume production responds to demand instantaneously! assume consumption responds to changes in disposable income instantaneously. Deriving IS relationships no govtY=ZY=C+SavingZ=C+II=Saving verify I=savingwith govtY=C+I+GI=Y-C-Gprivate saving=Y-T-Cpublic saving=T-Gnational saving=Y-C-Ghence I=national saving private saving equation S=-c0+MPS(Y-T) Equilibrium IS equation I=-c0+(1-c1)(Y-T)+(T-G)(ie the public saving) Explain how diseqm leads to inventory investment Originally the firm produces 100 units and it is the equilibrium output, now it decides to produce 200 units, according to Z=c1Y+autonomous spending, change in demand equals c1(0.5)*100=50, total demand=150, 50 units becomes inventory investment what is the paradox of saving as people attempt to save more, the result is both a decline in output and unchanged saving IN THE SHORT RUN mechanism behind paradox of saving-I=S perspective s=-c0+MPS(disposable income)when consumer wants to save more, c0 ↓1)-c0 ↑, s ↑2)consumption ↓, Z ↓, by eqm, Y↓, S↓ The government is not omnipotent because  Changing government spending or taxes is not always easy . The responses of consumption, investment, imports, etc, are hard to assess with much certainty. Anticipations are likely to matter . Achieving a given level of output can come with unpleasant side effects. Budget deficits and public debt may have adverse implications in the long run. mechanism behind paradox of saving-Y=Z perspective S=Y-T-CY=C+I+G(Y=Z)hence S=I+G-Tconsumer's decision to save more cannot affect I, G, TS does not change how to calculate GDP deflator nominal GDP/real GDP(specific base year) calculate inflation rate Pt: GDP deflator of tP(t-1): GDP deflator of t-1inflation rate=Pt-Pt-1/Pt-1 under what condition will chained type GDP and fixed based year GDP give different numbers produce more than one goodotherwise due to the different weights of goods, the estimate is not accurate problems with fixed based year overest. growth of years after base year and underest growth of years before base yearfrequent revisions how to calculate real GDP for 2001 in chained dollars matrix: base years dollars as column; years'productions as rowuse column results: production growth rate for both yearsavg production growth rate2000 index:1; 2001 index=1+avg rate2001 GDP in chained=nominal GDP in 2000*2001 index how to calculate eqm output and demand Y, Yd, C, multiplier, autonomous spendingoutput: mutliplierdemand: C+I+G why is tax called automatic stabilizer when T=t0+t1Y multiplier=(1-c1+c1t1)autonomous spending↑, Y↑, T↑, lessen the ↑in Yeconomy responds less to changes in autonomous spending than in the case where T is independent of Y suppose t depends on Y, if autonomous spending ↓, why is balanced budget requirement destabilizing? Y↓ and T↓to balance budget, ↓GY further ↓ suppose I=b0+b1Y, if b0 ↑, what is the ↑ in investment? (b0↑)+ b1*Y↑ if investment is exogenous(given), saving is unchanged Authoryhliuaa ID234663 Card SetECON CH1-3 DescriptionECON CH1-3 Updated2013-10-17T17:04:34Z Show Answers